Resurgent dollar faces crucial week

President Trump was out at the weekend shaking his finger at Federal Reserve chair Powell once again in his, some would (and did) argue, unhinged performance in a rambling speech at the conservative political fundraising operation CPAC. This saw the US dollar opening for trade a bit weaker in early Asia after Friday’s rather strong close, but the move was largely erased into early European hours, discounting the context of the remarks.

Equities are in a positive mood to start the week on the latest noise that the US and China are set to announce a deal that would end most tariffs. Trump and Chinese leader Xi Jinping may meet as soon as mid-March to sign off on a deal. Chinese equities may be focusing on the MSCI reallocation bump of (from 5% of its emerging market indices to 20%) and domestic speculative interest more than hard data. Note the South Korean February Manufacturing PMI up overnight at a new cycle low of 47.2.

The chief factor driving the resurgent greenback over the latter half of last week, in our view, is a reassessment of how quickly the Fed is likely to follow through on its pivot away from a tighter stance on monetary policy as well as higher yields all along the US yield curve. USDJPY was the first major USD pair to “break” in a technical sense and we look for possible follow-through elsewhere this week after the extensive bout of indeterminate range trading in the majority of USD pairs.

The ISM Manufacturing on Friday slipped to a new low since late 2016, but let’s recall two things: first, that it still suggests expansion, and second, that manufacturing is far less important than the non-manufacturing sector. Back in 2007, the ISM Manufacturing never registered a single reading as high as this February number of 54.2; the non-manufacturing ISM survey in January was 56.7 – a level that it fell below in mid-2006 and never recovered until 2011.

The US didn’t fall into recession officially until early 2008. The February ISM Non-manufacturing survey set for release tomorrow.

Elsewhere this week, our primary focus will be on whether the US dollar can finally piece together a directional move, possibly motivated by an extension higher in US yields if the ISM non-manufacturing survey is benign and the US February jobs report on Friday is likewise supportive. As well, a possible dovish pivot from the Reserve Bank of Australia tonight and the Bank of Canada on Wednesday could also set the tone with policy divergence the driving theme.

A number of weighty Fed speakers out this week as well, with the NY Fed’s Williams out speaking Wednesday, Brainard of the Board of Governors on Thursday, and Powell on Saturday discussing “Monetary Policy Normalisation and Review”. We are all looking for hints on the Fed’s thoughts about its balance sheet reduction, or QT, schedule.

Trading interest

For USDCAD, looking to stay long for a go well above 1.3400 and moving stops up to 1.3220.

For AUDUSD, looking for partial short positioning ahead of the RBA in spot or via options and then looking to add shorts if the RBA delivers with a dovish tilt and the price action shifts below 0.7050.

EURGBP: staying short for a go well below 0.8500 with stops above 0.8640.

Chart: AUDUSD

The Aussie looks rather heavy, given the positive outlook for a US-China trade deal and ebullient Chinese markets, but the focus is squarely on the domestic housing market and it may finally be time for the RBA to raise the white flag and execute a more profoundly dovish pivot that takes the Aussie down a few notches. The technical focus here is on a hold below the 0.7000 level for a test of the post-GFC low below 0.6900 (not including the flash crash lows in AUD pairs).